Wholesale Distribution Limited v The Commissioners for HMRC
[2024] UKFTT 514 (TC)
Hillhead Limited v The Commissioners for HMRC
21 February 2023
[2023] UKFTT 215 (TC)
First-tier Tribunal
Two companies bought and sold goods very quickly, making a tiny profit each time. The companies they bought from were cheating on their taxes. Even though the owner didn't know for sure, the judge said he should have known better because there were too many warning signs – it was too good to be true!
Key Facts
- •John Doyle was the sole director and shareholder of Hillhead Limited and Hillhead Plant Limited.
- •HMRC denied Hillhead's input tax deduction of £83,343 and Plant's input tax deduction of £254,311.63.
- •The transactions were connected to fraudulent VAT evasion by suppliers Citiflyte, Hy-Mac, and Countrywide.
- •HMRC argued that Doyle knew or should have known about the connection to fraudulent evasion.
- •Doyle's companies engaged in back-to-back transactions with minimal markups and no stockholding.
- •Doyle conducted insufficient due diligence on suppliers and lacked experience in the goods traded.
- •Suppliers failed to file VAT returns and had significant VAT debts.
- •Doyle's companies received payments from customers before paying suppliers, eliminating financial risk.
Legal Principles
Right to deduct input tax under Articles 167 and 168 of Council Directive 2006/112/EC and ss 24-26 of the Value Added Tax Act 1994.
Council Directive 2006/112/EC, Value Added Tax Act 1994
Loss of right to deduct input tax if the taxable person knew or should have known that the transaction was connected with fraudulent evasion of VAT (Kittel).
Axel Kittel v Belgium & Belgium v Recolta Recycling SPRL (C-439/04 and C-440/04) [2006] ECR 1-6161
'Should have known' test from Mobilx: includes those who should have known from the circumstances that transactions were connected to fraudulent evasion.
Mobilx Ltd (in Administration) v HMRC; HMRC v Blue Sphere Global Ltd; Calltel Telecom Ltd and another v HMRC [2010] STC 1436
Consideration of the totality of evidence, not just individual transactions (Mobilx, Red12).
Mobilx Ltd, Red12 v HMRC [2010] STC 589
It is not necessary to know the specific details of the fraud (Megtian, POWA).
Megtian Ltd v HMRC [2010] STC 840, POWA (Jersey) Ltd v HMRC [2012] STC 1476
Lack of knowledge of the specific mechanics of a VAT fraud does not prevent disallowance of input tax (Fonecomp).
Fonecomp Limited v HMRC [2015] STC 2254
HMRC must prove that the appellant knew or should have known of the connection to fraud, on the balance of probabilities.
AC (Wholesale) Ltd v HMRC [2017] UKUT 191 (TCC), HMRC v Citibank NA & Another [2017] EWCA Civ 1416, Re B [2009] 1 AC 1, Re S-B (Children) [2010] 1 AC 678
Outcomes
Appeals dismissed.
Doyle, and therefore Hillhead and Plant, should have known that the transactions were connected to fraudulent VAT evasion due to the totality of circumstances, including suspicious connections between companies, lack of due diligence, unusual transaction patterns, and the suppliers' fraudulent behavior.
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